Market Reaction Surrounding SEC Filings

Posted by Jim Naughton, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday April 14, 2009 at 9:55 am
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Editor’s Note: This post comes from Edward Li of the University of Rochester and K. Ramesh of Michigan State University

By arguing that the SEC’s EDGAR system provides instantaneous access to information in periodic SEC filings, recent studies document significant stock price reactions surrounding both 10-K and 10-Q filings. In our forthcoming The Accounting Review paper Market Reaction Surrounding the Filing of Periodic SEC Reports, we scrutinize these findings by taking into consideration the following facts: (1) 22.7% (16.4%) of interim (annual) SEC filing dates coincide with the first release of earnings information; (2) about a quarter of the 10-K filings are made within five days surrounding calendar quarter-ends when money managers report their quarterly holding; and (3) earnings announcements are increasingly preempting financial statement disclosures in periodic SEC filings.

Our analysis provides new evidence regarding circumstances in which a market reaction is observed surrounding the filing of periodic reports. First, we find significant price and volume reactions when periodic SEC reports coincide with earnings releases. However, with the exception of 10-K reports, we find no evidence of significant market reactions for the other periodic reports (i.e., 10-Q, 10KSB, and 10QSB) that follow earnings announcements. Second, we document that the market reaction to 10-K reports is limited to those filed around calendar quarter-ends. Consistent with the incentives of money managers to window dress and to “lean for the tape” for quarterly reporting purposes, we find a calendar quarter-end effect in both price and volume reactions that is generally unrelated to the filing of 10-K reports. However, while volume reactions for calendar quarter-ends with a 10-K filing are statistically indistinguishable from those without a filing, there is some evidence of an incremental price reaction to 10-K filing after the Sarbanes-Oxley Act, possibly due to the new disclosures required under the statute. Third, while we find support for information transfer from quarter-end 10-K filers to the other firms, we find no significant equity analyst forecast revisions around any type of periodic SEC filings, and no evidence of a calendar quarter-end effect in analyst reactions, suggesting that analyst actions do not contribute to the information transfer. The results for analyst reactions corroborate our findings regarding muted price and volume reactions.

While our study finds no pervasive evidence of market reaction to periodic SEC filings (especially the 10-Q filings), we are not suggesting that SEC filings have no economic or informational value. First, the circumstances in which researchers expect significant new information in periodic reports may also be the same circumstances in which firms may have incentives to provide complementary disclosures through a different medium. For instance, we show that when firms report a lower earnings number in their periodic filings compared to the figure reported in the earnings press releases, they almost invariably provide preemptive or concurrent press releases highlighting the downward revision to mitigate disclosure risk. Consequently, although the information is valuable, the concurrent price or volume reaction may be triggered by the more salient contemporaneous disclosure rather than the periodic SEC reports. Future research using market microstructure data can provide additional insights regarding the role of different disclosure channels. Second, the demand for the services of data aggregators such as Standard & Poor’s, FactSet, and Bloomberg indicate that various market participants such as money managers, other institutional investors, and credit analysts must consider the information in periodic SEC filings collected by data aggregators to be valuable for sophisticated investment and other economic decisions. Future research examining the role of information intermediaries in spreading corporate accounting information is likely to add to our understanding of the capital market information infrastructure.

The full paper is available here.


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